Journal of Banking & Finance 30 (2006) 3487–3501

www.elsevier.com/locate/jbf

Market structure and competitive conditions

in the Arab GCC banking system
Saeed Al-Muharrami a, Kent Matthews b,*
, Yusuf Khabari b

a
Sultan Qaboos University, Sultanate of Oman, Oman
b
Cardiff University, Cardiff Business School, Aberconway Building, Colum Drive, Cardiff, Wales CF10 3EU, UK

Received 3 March 2005; accepted 23 January 2006

Available online 24 July 2006

Abstract

This paper investigates the market structure of Arab GCC banking industry during the years of
1993–2002 using the most frequently applied measures of concentration k-bank concentration ratio
(CRk) and Herfindahl–Hirschman Index (HHI) and evaluates the monopoly power of banks over
the ten years period using the ‘H-statistic’ by Panzar and Rosse. The results show that Kuwait, Saudi
Arabia and UAE have moderately concentrated markets and are moving to less concentrated posi-
tions. The measures of concentration also show that Qatar, Bahrain and Oman are highly concen-
trated markets. The Panzar–Rosse H-statistics suggest that banks in Kuwait, Saudi Arabia and the
UAE operate under perfect competition; banks in Bahrain and Qatar operate under conditions of
monopolistic competition; and we are unable to reject monopolistic competition for the banking
market in Oman.
Ó 2006 Published by Elsevier B.V.

JEL classification: G21; L1; D40

Keywords: GCC countries; Concentration; Market structure; Competition; Panzar–Rosse model; k-bank concen-
tration ratio (CRk) and Herfindahl–Hirschman Index (HHI)

*
Corresponding author. Tel.: +44 (0)2920 875855.
E-mail address: matthewsk@cardiff.ac.uk (K. Matthews).

0378-4266/$ - see front matter Ó 2006 Published by Elsevier B.V.

doi:10.1016/j.jbankfin.2006.01.006
3488 S. Al-Muharrami et al. / Journal of Banking & Finance 30 (2006) 3487–3501

1. Introduction

The Gulf Cooperation Council’s (GCC)1 economies share a number of common fea-
tures. These economies are characterized by large oil producing sectors, dependency on
oil exports, stable currencies and stable price levels. Similarities also extend to geography,
longstanding cultural and political ties, a common language, high living standards and
coordinated policies. These similarities by far outweigh any differences.
The last 30 years have seen significant structural change in the GCC financial markets.
In particular, policies of financial liberalization and financial restructuring were imple-
mented with the goal of enhancing competitiveness in the banking sector. These policies
beg the following questions: how large are the banking markets in these six countries?
What is the structure of the banking market? Is the concentration in these markets increas-
ing or decreasing?
Studies of competitive conditions in the developed economies banking markets are
commonplace, there have been relatively few studies conducted for the GCC economies2
and no empirical work of a specialist nature. This paper investigates the market structure
of the GCC banking industry in the decade to 2002 with the aim of evaluating the monop-
oly power of the banks over this period. The paper aims to test the relationship between
the market structure and the competitive conditions of the banks in these six economies
using the most frequently applied measures of concentrations; namely the k-bank concen-
tration ratio (CRk) and Herfindahl–Hirschman Index (HHI) to measure concentration,
and the H-statistic of the Panzar–Rosse model to measure monopoly power.
The rest of the paper has the following structure: Section 2, provides a background to
the banking system in the GCC countries. Section 3, discusses measures of market struc-
ture and concentration. Section 4, presents the empirical result for the competitive condi-
tions in these markets. The final section concludes.

2. The GCC banking sector

The banking industry in the GCC countries is relatively young, with the oldest banks dat-
ing back to no earlier than the 1950s. Although the majority are privately owned, the role of
the public sector remains substantial. Whether through equity participation in several banks
or through a number of governments owned specialized credit institutions that provide
financing to public and private sector enterprises at subsidized rates, the public sector con-
tinues to have a prominent role in the banking industry of the GCC countries. Private sector
ownership of financial institutions also tends to be concentrated in a few shareholders; a
matter that reduces the threats (and benefits) of the market for corporate control.
Considering the region’s massive oil wealth, the combined Tier One capital of the GCC’s
top 50 banks at $31.5 billion is relatively small, amounting to 1.7% of the capital of the top
1000 world banks. The capital of all 50 GCC banks is considerably less than that of HSBC
(Hong Kong Shanghai Banking Corporation) Holdings at $35 billion. While GCC banks
have been able to receive the highest rating of any bank in the Arab world or the emerging
markets, the GCC has not been able to produce large powerhouse institutions that could

1
The Arab GCC countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates
(UAE).
2
Salem-Ghanem et al. (2002) examines concentration and equates concentration with lack of competitiveness.
 S. Al-Muharrami et al. / Journal of Banking & Finance 30 (2006) 3487–3501 3489

Table 1
The banking sector in the GCC in 2002
Country Banks Assets Branches DBranches
$billion 1995–2002
Saudi Arabia 10 134 1181 347
UAE 18 62 333 78
Kuwait 7 54 176 53
Qatar 6 15 71 30
Bahrain 6 9 77 16
Oman 5 9 296 115

be a force in the Arab or international banking arena. For number of reasons, many of them
political, the global trend towards consolidation has by-passed the Gulf. However, with
World Trade Organisation (WTO) liberalisation planned for the near future, banks will
be reconsidering their competitive strategies. As a recent report in the Banker stated,
‘GCC banks need to strengthen their position through consolidation in order to compete
effectively with international banks. The current fragmented banking sector will be unable
to put up a good fight when markets do eventually open up’ (The Banker, 2002).
A key assumption in quantitative analysis of banking is that the banks examined have
to be relatively homogenous, provide similar services and use similar resources. Commer-
cial banks operating in GCC are depository institutions that cannot take part in the leas-
ing and trading of real goods for commercial purposes. In contrast, development and
investment banks can engage in such activities, but they cannot accept deposits. These
non-depository institutions also do not extend small commercial and individual loans,
which require a substantial amount of investment in a brick-and-mortar branching net-
work, work force, and regulatory compliance. In fact, they are mostly single branch banks
that finance large long-term projects. Because of their small market share in the sector as
well as quite different technology, structure and goal, this study excludes development and
investment banks and instead concentrates on commercial and Islamic banks.
The data is obtained from financial statements of banks, on their web pages on the
internet, annual central bank reports, and from the Fitch-IBCA Ltd. Bankscope CD
Rom. This study covers 52 banks privately held and domestically owned that are fully
licensed commercial. Table 1 summarises the structural properties of the individual bank-
ing sectors of each country. It shows that Saudi Arabia has the largest banking market
measured by asset size and asset concentration per bank. It also dominates by having
the largest number of branches. In contrast, Oman has a smaller banking market but a
higher number of banks per unit of asset and a larger number of branches.
The sample period covers 1993–2002.3 The final sample consists of 484 bank-year
observations.

3. Measuring market structure

There are a number of measures of concentration that have been used in banking stud-
ies. Hall and Tideman (1967) suggested a list of six desirable properties for measures of
concentration. These are:

3
The sample period for UAE banks covers from 1995–2002.
3490 S. Al-Muharrami et al. / Journal of Banking & Finance 30 (2006) 3487–3501

1. A concentration index should be a one-dimensional measure.

2. Concentration in an industry should be independent of the size of that industry.
3. Concentration should increase if the share of any firm is increased at the expense of
a smaller firm.
4. If all firms are divided into K equal parts then the concentration index should be
reduced by a proportion 1/K.
5. If all firms are divided into N equal parts then the concentration should be a decreasing
function of N.
6. A concentration measure should be between zero and one.

In a review of 73 US Structure-Conduct-Performance studies in banking from 1961 to

1991, Molyneux et al. (1996a) report that in 37 studies, the 3-bank deposit concentration
measure was used. The second most frequently used is the Herfindahl–Hirschman Index
(HHI – 18 studies) followed by the number of firms in the market. Following the steps
of previous researchers and due to the limited number of banks in GCC, this paper will
use the highest 2 and 3 bank deposits as well as Herfindahl–Hirschman Index (HHI)
for deposits as a measure of market structure.
The theoretical links between the measures of concentration used in this paper and mar-
ket power have been explored by a number of researchers. Cowling and Waterson (1976),
Dansby and Wilig (1979) and Novshek (1980) have shown how a Cournot oligopoly will
generate equilibrium price-cost margins or Lerner indices as function of measures of mar-
ket concentration such as the Herfindahl–Hirschman Index. Similarly, a dominant cartel
of k-firms with a competitive fringe generates equilibrium price-cost margins related to the
k-firm concentration index (Saving, 1970).
Both simplicity and limited data requirements make the k bank concentration ratio
one of the most frequently used measures of concentration in the empirical literature.
Summing only the market shares of the k largest banks in the market, it takes the
form:

X
k
CRk ¼ Si:
i¼1

The index gives equal emphasis to the k leading banks, but neglects the many small banks
in the market. There is no rule for the determination of the value of k, so that the number
of banks included in the concentration index is a somewhat arbitrary decision. The con-
centration ratio may be considered as one point on the concentration curve, and it is a
one-dimensional measure ranging between zero and unity. The index approaches zero
for an infinite number of equally sized banks (given that the k chosen for the calculation
of the concentration ratio is comparatively small when compared to the total number of
banks) and it equals unity if the banks included in the calculation of the concentration ra-
tio make up the entire industry.
Since 1982, the US Department of Justice has based its merger guidelines on the HHI.
This measure, which is also used by bank regulatory agencies, is calculated by squaring the
market share of each firm competing in a defined geographic banking market and then
summing the squares. The HHI can range from zero in a market having an infinite number
of firms to 10,000 in a market having just one firm (with a 100% market share). The HHI is
 S. Al-Muharrami et al. / Journal of Banking & Finance 30 (2006) 3487–3501 3491

Table 2
Trends in concentration in deposit market
Country CR2 1995 CR2 2002 CR3 1995 CR3 2002 HHI 1995 HHI 2002
Saudi Arabia 0.38 0.38 0.54 0.51 1468 1298
UAE 0.39 0.34 0.53 0.44 1299 1064
Kuwait 0.48 0.49 0.61 0.62 1983 1897
Qatar 0.73 0.70 0.81 0.81 3996 3565
Bahrain 0.72 0.66 0.83 0.79 2738 2351
Oman 0.51 0.66 0.77 0.81 2258 2712
Source: Annual reports.

a static measure and, therefore, gauges market concentration at a single point in time.
Algebraically, it is

X
n
2
HHI ¼ ðMSi Þ ;
i¼1

where MS is the market share of the ith firm and n is number of firms in the market. The
index stresses the importance of larger banks by assigning them a greater weight than
smaller banks, and it incorporates each bank individually, so that arbitrary cut-offs and
insensitivity to the share distribution are avoided.
Based on the number of national banks in each of the six countries, we expect that the
2-bank deposits, 3-bank deposits and HHI value for testing the market structure in GCC
markets will give indications that Kuwait, Saudi Arabia and UAE markets could be
described as ‘unconcentrated markets’, while markets for Bahrain, Oman and Qatar could
be described as ‘concentrated markets’.
Table 2 presents the HHI and CRk for 1995 and 2002, where the total deposits and
have been taken as the measure of bank size. In general, the concentration ratio shows
the decreasing trend except for Oman. According to the current screening guidelines in
USA, these results would indicate that Bahrain, Oman and Qatar markets could be
described as ‘concentrated markets’.4 However, Kuwait, Saudi Arabia and UAE markets
could be described as ‘moderately concentrated markets’.
The HHI and CRk measures show that the Qatar, Oman and Bahrain banking sectors
are heavily concentrated. The natural policy concern is the welfare loss from non-compet-
itive pricing that could more than offset any presumed benefit associated with mergers or

4
According to the current screening guidelines in USA, the banking industry is regarded to be competitive
market if the HHI is less than 1000, somewhat concentrated market if the HHI lies between 1000 and 1800, and
very concentrated market if HHI is more than 1800. If the post merger market HHI is lower than 1800 points and
the increase in the index from the pre-merger situation is less than 200 points, the merger is presumed to have no
anticompetitive effects and is approved by the regulators. Should those threshold values be exceeded, the
regulators will check for the existence of potential mitigating factors. If the mitigating factors are not enough to
justify the merger, the regulators may require the divestiture of some branches and offices, in order to bring the
concentration ratio to or below the threshold level. If divestiture would not accomplish this goal, the merger
application is denied. A more complete discussion of HHI is presented in Rhoades (1993) and Federal Reserve
Bank (1998).
3492 S. Al-Muharrami et al. / Journal of Banking & Finance 30 (2006) 3487–3501

with the existence of large institutions. Other economic concerns about concentrated mar-
kets relate to the effectiveness of central bank policy, the increased probability of systemic
risk and possible reduction in lending to the small and medium corporations.5 The view on
the relationship between competition and market structure is based on the traditional
monopoly power hypothesis. According to this hypothesis, more concentrated markets
tend to be more collusive and banks earn monopolistic profits by working with a wider
margin of intermediation. These arguments are called ‘Structural Models’ because they
are based on the structure of the banking market6 and are challenged by other theoretical
approaches. In reaction to the theoretical and empirical deficiencies of the structural mod-
els, ‘Non-Structural Models’ of competitive behaviour have been developed. These ‘New
Empirical Industrial Organization’ approaches such as the Panzar and Rosse (P–R) model
measure competition and emphasize the analysis of the competitive conduct of banks
without using explicit information about the structure of the market.
This study employs the ‘Non-Structural Model’ approach suggested by Rosse and Pan-
zar (1977) and Panzar and Rosse (1982, 1987), so-called ‘H-statistic’, which has been
widely employed in the examination of the competitive structure of the banking industry
in various countries. The method developed by Panzar and Rosse (1987) determines the
competitive behaviour of banks on the basis of the comparative static properties of
reduced-form revenue equations based on cross-section data. Panzar and Rosse (P–R)
show that if their method is to yield plausible results, banks must also be in long-term
equilibrium (i.e., the number of banks needs to be endogenous to the model) while
the performance of banks needs to be influenced by the actions of other market
participants.
De Bandt and Davis (2000) show that the P–R approach require a number of working
assumptions. First, banks must be treated as single product firms (an assumption that is
more tenable for the GCC countries than for the developed economies). Consistent with
the intermediation approach to banking, banks are viewed as producing intermediation
services using labour, physical capital, and financial capital as inputs. Second, higher input
prices must not be correlated with higher quality services that generate higher revenues,
because such a correlation would bias the computed H statistic. This means, however, that
if one rejects the hypothesis of a contestable competitive market, this bias cannot be too
large (Molyneux et al., 1996b). Third, banks must be in long-run equilibrium.
Studies of the banking industry have seen an increase in the application of the Panzar–
Rosse methodology.7 Table 3 summarises the results of those investigations. Most of them
are for European countries and indicate that banks earn revenues as if they are under con-
ditions of monopolistic competition.
Following Shaffer (1982, 1985), Nathan and Neave (1989), Molyneux et al. (1994) and
Hondroyiannis et al. (1999), we estimate the following bank revenue function (Eq. (1)) in
which revenue is explained by factor prices and other bank-specific variables.8

5
The increased probability of systemic risk associated with concentrated markets has been formally shown by
Shaffer (1994).
6
Not to be confused with the notion of a ‘structural model’ in econometric modelling.
7
The first application was by Rosse and Panzar (1977), who employed a cross-section of data in order to
estimate the H-statistic for the newspaper firms in the local media markets.
8
Molyneux et al. (1996b) found that a log linear revenue equation gave similar results as a more flexible
translog equation. See also De Bandt and Davis (2000) for a discussion of the functional form.
 S. Al-Muharrami et al. / Journal of Banking & Finance 30 (2006) 3487–3501 3493

Table 3
P–R model results from other studies
Authors Period Countries Results
Shaffer (1982) 1979 New York Monopolistic competition
Nathan and Neave (1989) 1982–84 Canada 1982: perfect competition; 1983–84:
monopolistic competition
Lloyd-Williams et al. (1991) 1986–88 Japan Monopoly
Molyneux et al. (1994) 1986–89 France, Mon.: Italy; monopolistic competition:
Germany, France, Germany, Spain, UK
Italy, Spain, UK
Vesala (1995) 1985–92 Finland Monopolistic competition for
all but two years
Molyneux et al. (1996b) 1986–88 Japan Monopoly
Coccorese (1998) 1988–96 Italy Monopolistic competitiona
Rime (1999) 1987–94 Switzerland Monopolistic competition
Hondroyiannis et al. (1999) 1993–95 Greece Monopolistic competition
Bikker and Groeneveld (2000) 1989–96 15 EU countries Monopolistic competition
De Bandt and Davis (2000) 1992–96 France, Germany, Italy Large banks: monopolistic
competition in all countries;
small banks: monopolistic
competition in Italy, monopoly
in France, Germany
Bikker and Haaf (2002) 1988–98 23 OECD countries Monopolistic competition
Hempell (2002) 1993–98 Germany Monopolistic competition
Coccorese (2004) 1997–99 Italy Monopolistic competition

lnðTREVÞ ¼ a0 þ a1 ln PL þ a2 ln PK þ a3 ln PF þ a4 ln RISKASS
þ a5 ln ASSET þ a6 ln BR: ð1Þ

The revenue equation in the Panzar–Rosse model is interpreted as a reduced form rather
than a structural equation. The variables are defined as follows:

TREV the ratio of total revenue to total assets

PL ratio of personnel expenses to employees (unit price of labour)
PK ratio of capital expenses to fixed assets (unit price of capital)
PF ratio of annual interest expenses to total loanable funds – deposit and non-deposit
liabilities (unit price of funds)
RISKASS ratio of provisions to total assets
ASSET bank total assets
BR ratio of number of branches of a bank to the total number of branches per
country

The H-statistic value is the sum of the factor price elasticity: PL, PK, and PF. A value of
H 6 0 implies monopoly equilibrium. That is each bank operates independently as under
monopoly profit maximisation conditions (H is a decreasing function of the perceived
demand elasticity) or perfect cartel. A value of 0 < H < 1 implies that banks operate under
conditions of monopolistic competition with free entry equilibrium (H is an increasing
3494 S. Al-Muharrami et al. / Journal of Banking & Finance 30 (2006) 3487–3501

function of the perceived demand elasticity). A value of H = 1 is the perfect competition

case with free entry equilibrium and full efficient capacity utilisation.9
In long-run equilibrium, rates of return should be uncorrelated with input prices. To
test if the banking market is in long-run equilibrium we also estimate the auxiliary Eq.
(2), which tests for the equality of risk-adjusted rates of return across banks.

lnð1 þ ROAÞ ¼ b0 þ b1 ln PL þ b2 ln PK þ b3 ln PF þ b4 ln RISKASS

þ b5 ln ASSET þ b6 ln BR: ð2Þ

To verify that input prices are not correlated with industry returns, we regress the ratio
return on assets (ROA) as the dependent variable. Because ROA can take on small neg-
ative values, following Claessens and Laeven (2004)and Utrero-Gonzalez (2004), we com-
pute the dependent variable as ln(1 + ROA) where ROA is the unadjusted return on
assets. The long-run equilibrium test measures the sum of the elasticity of return on assets
with respect to input prices. If the E-statistic (b1 + b2 + b3) = 0, this implies that the bank-
ing market is in long-run equilibrium. If rejected, the market is assumed not to be in equi-
librium.10 It should be noted that equilibrium does not mean that competitive conditions
are not allowed to change during the sample period. It only implies that changes in bank-
ing are taken as gradual.

4. Empirical results

This study covers 52 banks privately held and domestically owned that are fully licensed
commercial. The number of bank-year observations per country is 60 for Bahrain, 70 for
Kuwait, 50 for Oman, 60 for Qatar, 100 for Saudi Arabia and 144 observations for UAE.
The sample frame is not dissimilar to previous studies. For example, Nathan and Neave
(1989) used samples of 39 observation on Canadian trust companies and 33 observations
on mortgage companies; and Shaffer and DiSalvo (1994) used samples of 36 and 44 obser-
vations on duopoly banks in alternate specifications.
The independent variables are chosen to account for firm specific and market specific
factors.11 Bank-specific risk is measured by the ratio of provisions to total assets (RISK-
ASS).12 We expect the effect of RISKASS on revenue to be positive since higher provisions
are associated with higher risk and higher expected return. Second, total assets, (ASSET)
are included in the analysis to account for possible scale economies.13 Third, the ratio of
each bank’s branches to total branches in the country, (BR), is used as a proxy for banks’
market share. Finally, PL, PK and PF are variables of the unit prices of the inputs of the
banks: labour, capital and funds or proxies of these prices.
The nature of estimation of the H-statistic means that we are especially interested in
understanding how total revenues react to variations in the factor prices, PL, PK and

9
See Rosse and Panzar (1977); Panzar and Rosse (1987); Shaffer (1983); Nathan and Neave (1989). Also
Coccorese (1998).
10
See Shaffer (1982) for the origination of this test and more recently for its application Molyneux et al. (1996b),
Hondroyiannis et al. (1999) and Claessens and Laeven, 2004).
11
See Nathan and Neave (1989), Molyneux et al. (1994), Hondroyiannis et al. (1999).
12
See also Coccorese (2004).
13
See also De Bandt and Davis (2000), Shaffer (2002).
 S. Al-Muharrami et al. / Journal of Banking & Finance 30 (2006) 3487–3501 3495

Table 4
P–R model aggregate results for the GCC banking market; ‘t’ values in parenthesis
Variable ln TREV ln (1 + ROA)
Pooled Country fixed effects Pooled Country fixed effects
Intercept 1.466 0.677 0.0041 0.0430
(13.52)*** (2.34)** (1.38) (4.99)***
lnPK 0.0520 0.0397 .0017 .0019
(2.79)*** (2.32)** (3.24)*** (3.75)***
lnPF 0.2002 0.2417 .0018 .0012
(9.90)*** (12.54)*** (3.26)*** (2.04)**
lnPL .0067 0.1899 0.0004 0.0043
(1.43) (4.89)*** (3.41)*** (3.72)***
lnASSET .0616 .3507 .0024 .0074
(2.85)*** (8.40)*** (3.98)*** (5.95)***
lnBR .0034 0.1781 0.0003 0.0034
(0.28) (8.28)*** (0.84) (5.27)***
lnRISKASS 0.0417 0.0378 .0006 .0007
(4.60)*** (4.58)*** (2.43)** (2.69)***
R2 0.2500 0.3900 0.0800 0.1400
H value 0.24a,b 0.47a,b –
E value – – .0031a 0.0012c
F-statistic 26.32119 28.48864 7.688253 8.050013
SE of regression 0.223765 0.200762 0.006206 0.005989
**
Significant at 5%.
***
Significant at 1%.
a
Significantly different from zero on Wald F test.
b
Significantly different from unity on a Wald F test.
c
Not significantly different from zero.

PF. Based on the measures of HHI and CRk as shown at Table 2, we expect that the H
values for testing the competitive conditions in the GCC are greater than zero and less
than one. It is, therefore, hypothesised that the banks in the GCC operate under condi-
tions of monopolistic competition.
The empirical results for the aggregated country-pooled data are reported in Table 4.
A test for the country fixed effects specification versus pooled rejected the pooled spec-
ification (F test for ln TREV was 22.92, and for ln(1 + ROA) was 6.95 both greater than
the critical value of 2.21). The sign on ASSETS suggests that as a whole the banking mar-
ket in the GCC faces diseconomies of scale, whereas there are significant market share
effects as suggested by the positive effect of BR on revenue per asset. The effect of RISKAS
on revenue is positive as expected and indicates that greater risk is associated with higher
revenue. On the fixed effects specification, the banking market is shown to be in long-run
equilibrium and the Rosse–Panzar H-statistic indicates that the GCC banking market as a
whole is operating under conditions of monopolistic competition.
While there are a number of advantages of using panel methods of estimation for the
GCC as a whole, the rejection of the pooled specification raise the possibility that the
country specific differences may disguise country-bank specific and competitive structure
differences within the GCC. These potential differences are explored by estimating
Rosse–Panzar H-statistics for each country banking market.
 3496
Table 5
P–R model for individual countries; ‘t’ values in parenthesis

S. Al-Muharrami et al. / Journal of Banking & Finance 30 (2006) 3487–3501

Variable Bahrain Kuwait Oman Qatar Saudi Arabia UAE
Intercept 5.443 1.977 3.570 2.168 2.605 0.567 (1.52)
(4.97)*** (2.24)** (2.48)** (2.73)*** (1.68)* (1.52)
ln PK 0.005 0.027 0.217 0.076 0.062 0.014
(0.14) (1.01) (1.61) (2.03)** (1.72)* (0.53)
ln PF 0.234 0.549 0.050 0.406 0.326 0.271
(5.37)*** (13.27)*** (0.60) (10.98)*** (10.32)*** (6.58)***
ln PL 0.472 0.468 0.011 0.146 0.616 0.747
(3.9741)*** (5.0686)*** (0.0830) (1.9285)* (4.3951)*** (1.0425)
ln ASSET 0.622 0.125 0.0279 0.117 0.244 0.170
(6.17)*** (1.66)* (0.40) (1.80)* (2.29)** (5.13)***
ln BR 0.826 0.050 0.192 0.082 0.135 0.201
(3.64)*** (0.34) (1.47) (0.99) (0.72) (4.31)***
ln RISKASS 0.010 0.006 0.051 0.031 0.013 0.039
(0.50) (0.60) (2.16)** (1.92)* (0.88) (2.09)**
H value 0.70 1.02 0.18 0.63 1.00 1.04
F test H = 0 34.8*** 111.5*** 0.92 78.5*** 59.1*** 2.03
F test H = 1 6.31** 0.20 40.5*** 27.3*** 0.00 0.00
Adj. R2 0.84 0.83 0.74 0.85 0.71 0.44
Competitive condition Monopolistic competition Perfect competition Undetermined Monopolistic competition Perfect competition Perfect competition
F-statistic 28.03305 27.45107 14.74449 29.00449 16.41724 19.80558
S.E. of regression 0.143286 0.063344 0.145660 0.075831 0.081207 0.231624
All countries estimated with fixed banks effects except UAE which is pooled (reject fixed effects).
*
Significant at 10%.
**
Significant at 5%.
***
Significant at 1%.
 S. Al-Muharrami et al. / Journal of Banking & Finance 30 (2006) 3487–3501 3497

Table 5 shows the estimates of the Rosse–Panzar H-statistic for each country banking
market. The auxiliary equations that indicate long-run equilibrium for each country (not
shown) confirm that the sum of the elasticities of factor prices is not significantly different
from zero. Therefore we can think of the banking sector in each economy as being in long-
run equilibrium.
The econometric results from Table 5 are mixed.14 In general, the value of the H-statis-
tic is significantly determined except in the case of the UAE. The disaggregated picture of
competitive conditions is not consistent within the GCC. The banking sectors in Bahrain
and Qatar appear to operate in conditions of monopolistic competition, whereas Kuwait,
Saudi Arabia appears to operate in conditions of perfect competition. Because the
estimated value of H for UAE is not significantly different from 1 (F = 0.00), the UAE
banking sector is also consistent with perfect competition.
However, this interpretation is subject to the caveat that the value of H for UAE is not
estimated with high precision. The estimated value of H for Oman is not significantly dif-
ferent from zero or, by continuity, from some small positive number; we cannot reject the
hypothesis of monopolistic competition for the Oman banking industry. Thus, the result
of Oman should be considered ‘undetermined’ rather than ‘monopoly’.
The sign of the RISKASS variable is positive and statistically significant in the case of
Oman, Qatar and UAE (Qatar at the 10% level of significance). This indicates that banks
that have riskier positions have higher rewards as measured by higher revenues per cur-
rency of assets. The coefficient on the value of assets (ASSET) is negative and significant
in the case of Bahrain, UAE and Saudi Arabia, implying that larger banks seem to be less
revenue efficient compared with smaller banks. The coefficient on the variable relating to
size effects in terms of branches, BR, is positive and significant for Bahrain and UAE, sug-
gesting that a greater number of a bank’s branches give higher total revenue. This indicates
that Bahrain, and UAE are not over branched and might have a scope of branch expansion.

5. Conclusions

This paper investigates the market structure of GCC banking industry during the peri-
ods of 1993–2002 and evaluates the monopoly power of banks. To our knowledge, no
econometric analysis of competitive conditions of banking in the GCC economies has been
conducted before. Our investigation suggests that there is some merit to examining the
banks of the GCC countries as an aggregate. In total the GCC banking system can be
thought of as operating under conditions of monopolistic competition. However, there
is considerable variation within each economy.
The results show that Kuwait, Saudi Arabia and UAE have unconcentrated markets
and are moving to less concentrated positions. The P–R results suggest a mixed bag of
competitive, monopolistic competition and monopoly within the GCC economies. The
finding of perfect competition in the case of Kuwait and Saudi Arabia (and possibly
UAE if the value of H is taken as 1) coincide with the results of measures of concentration
CRk and HHI as shown in Table 2. This could be explained by either the presence of the

14
We also test for a delayed effect of input prices on revenue caused by the possibility of fixed-rate loans of
greater than one-year maturity. A dynamic version of Eq. (1) is estimated with one-year lags of input prices. The
results are presented and discussed in Appendix. We are grateful to an anonymous referee for suggesting this
exploration.
3498 S. Al-Muharrami et al. / Journal of Banking & Finance 30 (2006) 3487–3501

foreign banks in these countries as well as the preparation of these three countries for
entering in WTO and the implications of ‘threat of entry’. The H-statistics is 0.70 and
0.63 for Bahrain and Qatar, indicating that the banks in these two countries earn their rev-
enue under monopolistic competition. The H-statistics is 0.18 for Oman, indicating that
the banks in Oman earned their revenue under monopoly conditions. Our findings suggest
that except in the case of Saudi Arabia and Kuwait, the banking market in the rest of the
GCC has yet some way to go in developing a competitive structure if it is to face the forces
of global banking competition.

Acknowledgements

We are grateful without implication to two anonymous referees and the editor for help-
ful comments and advice. Naturally all remaining errors are ours.

Appendix A. Dynamic P–R model

This appendix reports the results of a dynamic version of Eq. (1) for each country
described as

lnðTREVÞit ¼ a0 þ a1 ln PLit þ a2 ln PKit þ a3 ln PFit þ d1 ln PLit1 þ d2 ln PKit1

þ ln PFit1 þ a4 ln RISKASSit þ a5 ln ASSETit þ a6 ln BRit þ uit :

The variables are as described in the text, ‘i’ represents the bank in each country, ‘t’ rep-
resents time, and u is a random term. The H-statistic is calculated as the sum of the input
price elasticities given by
H ¼ a1 þ a 2 þ a 3 þ d 1 þ d 2 þ d 3 :

Similarly the long-run equilibrium Eq. (2) was modified in the same way as above and de-
scribed below, where e is a random term.

lnð1 þ ROAÞit ¼ a0 þ a1 ln PLit þ a2 ln PKit þ a3 ln PFit þ d1 ln PLit1 þ d2 ln PKit1

þ ln PFit1 þ a4 ln RISKASSit þ a5 ln ASSETit þ a6 ln BRit þ eit :

The long-run equilibrium test is given as

E ¼ a1 þ a2 þ a3 þ d1 þ d2 þ d3 ¼ 0:

Table A1 presents the results for the revenue function. The last row of the table shows that
the long-run equilibrium condition was satisfied for each country on a Wald F test. The
computed H-statistics did not alter the results regarding the competitive condition of each
banking market shown in Table 5. In most cases the additional lags of input prices were
statistically insignificant, except for Saudi Arabia.
A variable deletion test on the additional lags of input was rejected for Saudi Arabia on
a conventional ‘F’ test (second last row of Table A1). The lag of the unit price of labour
and unit price of funds were both statistically significant at the conventional level. The sum
of the elasticities of the current and lagged unit price of labour is similar to that of the
Table A1
P–R model for individual countries; ‘t’ values in parenthesis
Variable Bahrain Kuwait Oman Qatar Saudi Arabia UAE
Intercept 2.955 1.827 2.348 1.426 1.689 0.390

S. Al-Muharrami et al. / Journal of Banking & Finance 30 (2006) 3487–3501

(2.93)*** (1.89)* (1.66)** (1.88)* (1.79)* (1.13)
ln PK 0.010 0.012 0.238 0.082 0.070 0.023
(0.19) (0.42) (1.72)* (1.75)* (2.01)** (0.48)
ln PK(1) 0.006 0.022 0.029 0.012 0.050 0.029
(0.09) (0.80) (0.21) (0.28) (1.39) (0.59)
ln PF 0.141 0.525 0.231 0.393 0.459 0.425
(2.77)*** (7.30)*** (1.26) (4.28)*** (6.792)*** (3.61)***
ln PF(1) 0.029 0.006 0.027 0.014 0.089 0.002
(0.68) (0.14) (0.23) (0.24) (2.41)** (0.03)
ln PL 0.488 0.290 0.025 0.070 0.257 1.048
(3.92)*** (2.37)** (0.15) (0.48) (1.66)* (0.92)
ln PL(1) 0.159 0.016 0.113 0.140 0.371 0.287
(1.22) (0.32) (0.74) (0.85) (2.49)** (0.25)
ln ASSET 1.971 0.652 0.233 (0.66) 0.349 0.852 0.326
(8.27)*** (2.38)** (0.66) (1.45) (2.98)*** (4.00)***
ln BR 1.033 0.275 0.294 0.084 0.376 0.162
(6.78)*** (2.21)** (1.74)* (0.99) (1.89)* (3.24)***
ln RISKASS 0.011 0.008 0.052 0.038 0.013 0.028
(0.61) (0.68) (1.60) (2.17)** (0.96) (1.39)
H value 0.49 0.83 0.07 0.69 1.12 1.24
F test H = 0 12.46*** 36.24*** 0.09 44.69 *** 60.74*** 0.45
F test H = 1 13.01*** 1.58 13.34*** 9.26 *** 0.68 0.02
Adj. R2 0.92 0.72 0.32 0.77 0.75 0.20
Competitive condition Monopolistic competition Perfect competition Undetermined Monopolistic competition Perfect competition Perfect competition
F test lags = 0 0.60 0.07 0.07 0.77 4.94** 0.00
F test E = 0 0.01 1.03 0.36 0.01 0.54 1.01
All countries estimated with fixed banks effects except UAE which is pooled (reject fixed effects).
*
Significant at 10%.
**
Significant at 5%.
***
Significant at 1%.

3499
3500 S. Al-Muharrami et al. / Journal of Banking & Finance 30 (2006) 3487–3501

partial elasticity on the unit price of labour shown in Table 5, suggesting a distributive
effect over a two-year period. The negative and significant coefficient on the lag of the unit
price of funds suggests that in the case of Saudi Arabia there is a dynamic effect that indi-
cates the presence of fixed-rate loans of greater than one-year maturity. All other variables
have a similar effect on revenue as in Table 5. Importantly, Table A1 does not alter the
conclusion of the state of the banking market in each country as given in Table 5.

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